POTENTIALLY EXCITING WEEK AHEAD FOR STERLING

Inflation expected to rise above 4%; Bank of England Inflation Report due on Wednesday. Federal Reserve Chairman aims to stick with accommodative monetary policy.

Sterling ratcheted lower through the week, covering a range of about two cents and losing a net one cent.

As the range and change suggest, it was not the most exciting week for sterling. Meaty data were in short supply. The British Retail Consortium opened the batting with a 2.3% monthly increase in sales for January. At the same time the Royal Institute of Chartered Surveyors reported an improvement in its house price balance from -39% to a slightly less dismal -31%. Wednesday's trade figures were less enchanting with another record monthly deficit in December, this time of an overall -5.8 billion. Thursday's industrial and manufacturing production figures were a slight disappointment too. Overall industrial production was on target with a 0.5% increase but the narrower manufacturing figure clocked a -0.1% decline in December. On the year manufacturing production grew by 4.4% and industrial production by 3.6%; both of those numbers were lower than expected. The producer price index data on Friday were all higher than forecast. In January manufacturers' costs rose by 1.7% while factory gate prices went up by 1.0%. Costs outstripped revenues over the 12 month period as well, by 13.4% to 4.8%.

The Bank of England's monetary policy announcement on Thursday was exactly as had been expected. The Bank Rate remains at 0.5% for another month and the quantitative easing asset purchase programme stays on hold at 200 billion. The wording of the Bank's statement was identical to that of the last seven months. What the Bank failed to do was to allay suspicion that a rate increase is in the offing. Figures this week are expected to show consumer price index (CPI) inflation above 4%, more than double its target level. It is fair to acknowledge that a good half of that inflation is the direct result of a second January VAT increase. Putting up Joe Public's mortgage payments through a higher Bank Rate will not bring VAT down - or, for that matter, the global price of oil. But there is growing pressure on the Bank of England to be seen to be doing something about well-above-target inflation. Persistent inaction would bring accusations of dereliction of duty.

The dollar's week was no more exciting than that of sterling. The only statistics of any consequence were the weekly jobless claims, the December trade balance and the University of Michigan's consumer sentiment index. The jobless numbers were tidy enough; initial and continuing claims were both lower than expected. The trade deficit was almost bang on target at -40.5 billion and consumer confidence improved by a point to 75.1. None of them had any obvious impact on the value of the dollar.

Nor, in the long run, did Federal Reserve Chairman Ben Bernanke's testimony make any impression on his currency. He told congress that "we do not now have a problem" with inflation. He said the current $600 billion round of quantitative easing would run through to completion in June unless inflation picked up or the economy began to grow "very quickly". Mr Bernanke has no intention of tightening policy any time soon.

That will probably be borne out by the minutes of the last Federal Open Market Committee meeting, published on Wednesday evening. The week's main US ecostats will be Tuesday's retail sales and Thursday's CPI. Sterling's challenges will be Tuesday's inflation numbers, Wednesday's unemployment and Friday's retail sales. Wednesday also brings the Bank of England's quarterly Inflation Report, complete with a speech from the governor.

The dollar's gains last week were not obviously connected to anything done by the US economy or said by anyone important. Sterling/dollar appears to be in a holding pattern with an upward bias.